HP/Compaq: Brave faces hide real fears

Channel partners are putting a brave face on Hewlett-Packard's acquisition of Compaq, but the mega-merger has triggered genuine concerns for the future.

The channel research specialist Canalys says the consolidation is good news for the competitors of HP and Compaq. Channel partners, it maintains, will suffer and they should start planning now to protect their businesses.

However, Canalys chief executive Steve Brazier cautioned against hasty action. "Nothing is definite," he said. "Regulators need to approve the deal, but channel partners should be preparing for a new company emerging in mid-2002."

He recommended carrying out a financial analysis to determine how much HP and Compaq reseller programmes are responsible for profitability, while at the same time looking into possible mergers with other channel players, forging stronger relationships with alternative suppliers and diversification.

"This is a historic turning point in the history of the PC industry," said Brazier. "If the number two player, Compaq, thinks there is no viable future in PCs carrying it forward, then the Compaq channel should come to the same conclusion."

The merger, he believed, represented a "victory" for Dell's PC price war strategy, and must be a warning for channel players. "HP and Compaq, along with Microsoft, are the vendors that kept the channel alive," said Brazier. "This deal is about consolidation, not expansion. It is about removing costs from two companies that have been losing money in PCs, rather than entering new markets or developing solutions."

As the merged companies bed down there will be a period of confusion that will hit channel partners. Customers will want to know which product ranges will survive and which will be scrapped, and they will be reluctant to commit IT budgets to the unknown. Resellers will have their hands full reassuring customers.

Some end users, such as Sainsbury's, are stoic about the merger. The retail giant, a big HP user, told CW360: "Because these things take a while to come to fruition, we don't think we will change our current purchasing practices in the short term."

But the channel should also prepare for the long term. While Compaq and HP will attempt to provide adequate notice in relation to product transitions, senior Canalys analyst Chris Jones cautioned: "A scenario where an HP salesperson says that the Compaq range is sure to be discontinued, while a Compaq salesperson says the opposite, seems a certainty. The natural result is that existing customers will either postpone decisions or switch to a competitor."

Sue Richards, a director at the HP reseller Evans Business Machines, took a positive view of the merger. The deal, she said, is "great news for the HP reseller" and will create further business as "two top technology companies work together".

However, Brazier warned that HP-only resellers "should not jump to conclusions". "Although HP is top dog worldwide, it is entirely possible that HP could look at operations individually in each country and conclude Compaq resellers are stronger there, and put them in charge," he added.

Pete Collins, a corporate account manager at Data Pact, a hardware reseller of both HP and Compaq products, was pessimistic. He said the merger was a "shock" that had left the channel "unsure about the direction the companies will move in". Customers wanting to be sure a manufacturer is "not about to drop a brand", he added, will look elsewhere.

Jonathan Chapple, the chairman of Equanet, a reseller that relies heavily on Compaq sales, expressed sadness about the merger but said it was a pragmatic move.

However, he warned that rationalisation of products - particularly in the server market - could be a tough problem for the two companies to sort out. "If the organisation is not handled well and customers feel that it is losing momentum, it will be an opportunity for Sun," he said

Brazier agreed and observed that "new, large customers will not begin considering either vendor for at least 12 months. This gives Dell, Sun and others great short-term opportunities to win new business."

Sun's UK product marketing manager, Ian Meakin, revealed that his company was already making the most of the opportunity. "Resellers and customers don't need to stick with a couple of confused giants who aren't going anywhere," he said. "Sun will be contacting every single reseller and inviting them to join us."

Of all the challenges facing resellers, Brazier said the biggest is not the potential lost revenue but the consolidation of the HP and Compaq marketing programmes. These have "made the difference between survival and collapse for many of Europe's resellers," he argued.

As HP and Compaq slash costs "almost overnight, one of these pots of gold will now disappear for distributors and corporate resellers," warned Brazier. "They can add up to a substantial part of resellers profits."

Research group IDC warned that channel partners should prepare for the merged company to start cherry-picking as it reduces its roll of partners. PC analyst Sami Pohjolainen said: "They will determine who the best partners are and what channel programmes are most successful. Expenditures toward the channel could be cut in half."

Alan MacNeela, a principal analyst at Gartner, agreed. He predicted "some consolidation, particularly at the low-end where distributors are only moving product".

In an attempt to prevent their business being part of the cull, Mac Neela advised partners to focus on "establishing contact with the most senior executives at HP and Compaq in the country they are in".

Although many channel partners are putting a positive gloss on the merger, cracks caused by the confusion are showing through.

Steven Raymund, chief executive of the IT distributor Tech Data, said he believed that channel programmes would "evolve in response to the marketplace, just as they would have if both companies had continued independently".

However, he added: "There is a uncertainty in the short term because a lot of people will see a change in their jobs."

The most positive spin which channel players can offer is that the deal will lead to a welcome streamlining of products, reducing complexity for resellers and their customers.

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